- Email: [email protected]
Greenhouse gas emissions trading in BP
. Energy Policy 31 (2003) 657–663
Greenhouse gas emissions trading in BP Mark Akhurst*, Jeff Morgheim, Rachel Lewis BP International, Britannic House, 1 Finsbury Circus, London EC2M 7BA, UK
Our goal is to reduce our emissions of greenhouse gases by 10% from a 1990 baseline In our terms that target will now sit alongside our financial targets. That means it is a promise and, as with our financial targets, a promise is a personal commitment Lord Browne Yale School of Management—18 September, 1998
and was the first global greenhouse emission trading system of its kind anywhere in the world. This paper sets out the theoretical case for the use of trading to achieve environmental objectives; explains the thinking behind BPs implementation of an internal emissions trading system and outlines the lessons learned from the operation of that trading system. 2. The case for emissions trading
One of the steps we’ve taken is to set up a trading system within the company to ensure we cut emissions in the most cost effective way possible. Over the next 18 months we’ll expand that system to include all the activities of BP Amoco Lord Browne Detroit Economic Club—25 January, 1999
1. Introduction In September 1998, Lord Browne, CEO of BP, announced that BP would set itself the target of reducing its greenhouse gas (GHG) emissions to 10% below 1990 levels by 2010. In March 2002, at Stanford, Lord Browne announced that BP had met its target, 7 years ahead of schedule, and went on to outline BPs new commitments on climate change, to hold emissions at 2001 levels, through 2012, through a combination of improved internal energy efficiency and the use of external market mechanisms, including emission trading and emission reduction credits. A key element in BP meeting its first target has been the use of emissions trading. BP used a group-wide emissions trading system as a central tool to deliver the target in the most cost-effective way possible. The system began trading group-wide on January 1st 2000 *Corresponding author. E-mail address: [email protected], [email protected], [email protected] (M. Akhurst). URL: http://www/bp.com.
Economic theory suggests that ‘‘trading’’ emissions should allow an environmental target to be achieved at the least cost to the economy. This is because firms for whom emissions reduction are cheap, can reduce their emissions and sell those emission rights to firms who would have to pay more to reduce their greenhouse gas emissions. Trading should be a better way of achieving the world’s objectives than the suggested alternatives— command and control regulation which imposes the same standard on everyone, irrespective of the costs they face or taxation, which just raises the price to everyone, irrespective of whether they have a cheap alternative or not. These are both blunt instruments, whereas emission trading is a precision tool. Trading is an important policy alternative to taxation, and has the important advantage that it can work with voluntary agreements (it may be possible for it to work with tax). The aim of both trading and voluntary agreements is to motivate positive responses to a shared problem. In a trading system, companies (assuming they are the trading entities), receive emissions allowances for greenhouse gases. They need to reduce their emissions to that level, buy allowances from others to effectively reduce their emissions, or sell to others if they have an excess of allowances. Trading is a market mechanism that has considerable appeal. It drives companies to look at what options they have available to reduce emissions, in a very quantitative way. And when the market exists, it makes companies ask themselves why competitors are finding lower cost options than they have found themselves. It is a stimulus to bringing new technology into practice,
0301-4215/03/$ - see front matter r 2003 BP plc. Published by Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 1 5 0 - 7
658
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Emissions Trading
Emissions Trading
Clean Development Mechanism (CDM)
Economic logic is clear
Political challenge is great
They provide cost effective approaches to mitigation
There are still many details to be resolved
Could provide benefits for both developed and developing countries and the private sector Need for collaboration between private sector and government to develop these mechanisms into useful tools
Fig. 1. Kyoto protocol, flexible instruments.
because it sets a real cost on emissions and provides market incentives to reduce that cost. Greenhouse gases are particularly appropriate for trading. Unlike other pollutants, where the local impact matters, the goal is to reduce global concentrations of CO2 and the other greenhouse gases, the effect is the same if emissions are reduced in Pittsburgh or Portugal, the North Sea or the Gulf of Mexico. But there is only limited experience of emissions trading in practice. The most successful example of emissions trading is the United States sulphur dioxide trading scheme, which delivered the required emissions reduction faster and at less cost than had been predicted. The agreement at Kyoto commits most OECD countries, the countries of Central Europe, Russia and Ukraine (the ‘‘Annex 1’’ countries) to targets for the period 2008–2012 for a basket of six greenhouse gases to be achieved. These targets are differentiated, to take account of different national circumstances, but require, on average, approximately a 5% cut from 1990 emissions levels. Since emissions would otherwise have been expected to grow, and in most cases are already higher than 1990 levels, the targets imply deeper cuts compared to a ‘‘business as usual’’ base. Other countries were not given targets at Kyoto. The protocol makes provision for three types of ‘‘flexible mechanisms’’ or Kyoto mechanisms: * *
*
in Article 17, for trading between Annex 1 countries; in Article 6 for joint implementation projects between Annex 1 countries; in Article 12 for credits to be earned for projects in non-Annex 1 countries through the Clean Development Mechanism.
Rules have yet to be fully developed for these three ‘‘flexibilities’’. Several governments are progressing with domestic emissions trading schemes:
The United Kingdom has started a voluntary GHG emissions trading scheme, which began trading in April 2002. Other countries including Denmark, France and China are at various stages of development with their own domestic schemes. The European Union is in the process of developing an emissions trading directive (Fig. 1). BP believes that there is a strong case for allowing international trading of emissions to deliver the agreed emissions reductions at least economic cost. It believes that emissions trading will prove to be a better instrument than either of the two principal other options—taxation and command and control regulation. Some of the advantages of emission trading are: *
*
*
*
the method by which emissions are reduced is not prescribed and therefore allows flexibility to achieve the most economically efficient emissions reductions; it provides the appropriate price ‘signal’ for emissions abatement and therefore the incentive to invest in abatement technology; the ‘market’ for emissions will price emissions appropriately and give the right signals for efficient investments to meet the required target; under a cap and trade system there is greater certainty that prescribed targets will be achieved since there is a determined finite number of allowances allocated.
3. Establishing the BP emissions trading system BPs basic operating model lends itself to the implementation of an emissions trading system. The basic model consist of four business streams: * *
Upstream (exploration and production). Downstream (refining and marketing).
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
659
Fig. 2. BP portfolio.
CO2 equivalent emissions from BP Business Units 1st
2nd
3rd
4th
100%
5th
90%
8000
80%
7000
CO2 equivalent (K tons)
70% 6000 60% 5000 50% 4000 40% 3000 30% 2000
Culumative percentage of CO2 equivalent emissons
9000
20%
1000
10%
0
0% Business units
Fig. 3. Distribution of allowances to BP business units.
* *
Chemicals. Gas, power and renwables.
Within each stream, individual business units (BUs) have their own performance contracts to deliver agreed objectives. When BPs emissions trading system began in 2000, there were approximately 150 individual BUs within BP, operating in 100 countries. The BUs varied greatly in their emissions, for example, 40 BUs accounted for approximately 80% of BPs total emissions. All BUs were given an allocation of allowances and all were eligible to participate in the trading system (Figs. 2 and 3). The development of BPs trading system was carried out jointly by a BP team, comprising representatives
from all relevant parts of BPs business, together with Environmental Defence (ED) who played an important independent guiding role in the development of the system.
4. Emissions data—measurement and verification The cornerstone of a successful emissions trading programme is having a robust and credible system in place to measure, and where appropriate, verify the greenhouse gas data being used in the trading system. Each BU is responsible for measuring or calculating its emissions. Standard reporting protocols for carbon dioxide (CO2) and methane (CH4) have been used by
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
660
ACT Greater Prudhoe Bay NGL
Shipping
Canada Gas Cherry Point San Juan Permian Carson
Whiting Texas City Castellon Cooper River Mid Continent Gulf of Mexico Trinidad East Trinidad West Global Power Venezuela
East of Shetland Forties pipeline CNS Gas Kazakhstan Bayernoil Azerbaijan Lavera Egypt Oil Gulf States/ Abu Dhabi
Indonesia Australia Upstream
Sapref
Site visits 2001
Limited Scope Reviews
Site visits 1999/2000
Fig. 4. BP sites audited in 2001.
the BU’s to collect and report 1990 and 1998 emissions data, as part of BPs overall environmental performance reporting. A data audit and verification has been developed with a group of external partners (KPMG, DNV and ICF), selected to provide the appropriate skills from the financial and environmental auditing sectors. For 2000 and 2001, in the auditor’s opinion, our total (direct and indirect) equity share GHG inventory has been found to be free from material mis-statement when verified against our group reporting guidelines. The auditors have recommended areas for improvement to our data and assurance processes and we plan to review these suggestions for incorporation into our group reporting guidelines and other procedures, where appropriate (Fig. 4). 4.1. Abatement costs Understanding the cost of abatement on a project-byproject level is vital for BUs to engage in emissions trading. Guidelines for calculation methodology and assumptions have been developed for BUs to maintain some consistency in the approach. It was each individual BUs responsibility to identify and know its cost of abatement. A database of greenhouse gas abatement projects was constructed to share ideas on cost effective options throughout the BP group. 4.2. The emissions boundaries in our system The GHG emissions boundaries for our ET system were set on an equity and direct basis. This was the same as for the Group GHG target. Equity means emissions
from all equity stakes in operated and non-operated activities by BP. Direct means emissions which come directly from these operations, this excludes emissions from imported power and steam used in our operations (Fig. 5).
5. A broad outline of BPs emissions trading system BPs emissions trading system was based on a cap and trade concept. In order to put such a scheme in place two key elements were needed—target setting the cap on emissions and a system for allocation of allowances to the participating BUs. Each BU was allocated a fixed number of annual allowances to emit greenhouse gases. A BU was required to stay within its allocation annually—if its actual emissions were above its total number of allowances for that year the BU was required to buy allowances from the market to ensure compliance. If its emissions were below the allocation, it could sell allowances. Throughout the year BUs were able to trade allowances with other participants in the system through the central broker, buying up or selling out allowances to cover their projected emissions. All deals were registered and traded through the central broker who was based in BPs Integrated Supply and Trading (IST) group. Both carbon dioxide (CO2) and methane (CH4) were traded in the BP system. For reporting purposes, CH4 was reported in units of CH4 but was converted to CO2 equivalent units for trading. CH4 has a global warming potential (GWP) 23 times that of CO2 over a 100 year
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Understand your Emissions Source and Type
Measure and verify your emissions
661
Identify GHG reduction opportunities across your business
Implement trading strategy
The key is to understand emissions from your business, where they are heading and the marginal cost of abatement then compare with the market price Some measures may have +ve economic impacts Need to re-think management of energy Engage employees to meet the challenge and identify solutions Communication and networking within and between BUs to identify best options - Collaboration
Fig. 5. Engaging in emissions trading.
emissions limit after trading carbon dioxide emissions
time horizon—therefore BP decided so set one tonne of CH4 emissions equal to 23 t of CO2 in the trading scheme. The unit that was traded in our emissions trading system was termed an allowance. BU’s allowances were held centrally at IST in a GHG registry. One allowance equated to one metric tonne of CO2 equivalent and each had a unique serial number that was used as a tag to identify the vintage (year), the originating BU and country of origin. It was important to keep a record of the flow of allowances between countries in the event that regulation take place at the national level (Fig. 6).
units bought
-10
+10
units sold
emissions limit before trading
emissions limit after trading
50
Each company is allocated 50 permits to emit 50 tonnes
Company 1
50
Company 2
Fig. 6. Emission trading in BP.
6. Ensuring compliance in the BP system *
Greenhouse gas allocations were fixed in the performance contracts of Business Unit Leaders (BULs) and progress reported in the financial performance indicators for the company. BULs were therefore accountable for meeting their targets on an annual basis—the GHG performance therefore sat alongside their financial performance and required equal consideration. Therefore, the performance contract was the compliance mechanism in the BP system. As allowances were not yet externally recognised, assets, costs and revenues from trades were tracked and used to assess trading performance relative to investments in GHG reductions, but were not part of ‘above the line’ performance.
7. The group cap A group cap was set annually to steer BP towards the GHG target—it was therefore the central link between the allocation process and the GHG target, having two primary objectives:
*
incorporate a ‘‘real’’ annual reduction, i.e. to drive real operational reductions; steer progress towards the 10% reduction target.
7.1. Setting the group cap The group cap determined the total aggregate allowances available to the BUs. The Group cap was referenced to BPs 1998 GHG emission level. This is sometimes referred to as a grandfathered approach—i.e. allocating back to some historic point in time. 1998 was chosen as the base year as it was, at the time, the latest and most accurate set of data for the BP Group and most relevant to the composition of BP at the time. The aggregate total was also very similar to the total in 1990, which is the base year for our GHG target. The group cap was set to take account of change within the organisation. Allowances associated with divestments or closures were cancelled. Conversely, new acquisitions were given allowances based on their 1998 emissions but were also faced with a reduction target.
662
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Fig. 7. BP emissions trading system 2001.
8. How the allocation was made to the individual BUs The starting point of allocations was the BUs’ actual emissions in 1998. ‘Emissions’ for this purpose were direct emissions from BP assets, apportioned according to the BP equity share in the facility.1 The annual group cap, less the quantity of allowances banked from the previous year, was expressed as a percentage reduction from the Group 1998 emissions or ‘allocation factor’. The allocation factor, applied to each BU’s 1998 emissions, set the BU allocations. No allocations were given for growth in operations. Allocations were adjusted for acquisitions and divestitures. (Note: Streams were given some flexibility to adjust 1998 emissions for shutdowns prior to the system start-up in 2000.) When the allocation process was complete, each BU registered that allocation with the Broker in IST. This was the allocation that the BU was required to operate within, by its own actions, or by trading. This approach aligned the allocation process to the delivery of the group target (i.e. the group was required to deliver reductions against existing emissions and absorb growth). It also ensured that emissions reduction options were considered during new project developments.
threshold of a maximum of 5% of an individual BUs allocation could be banked. 8.2. Market summary In 2000, BP launched its trading system covering all of the former BP and former Amoco assets. A total of 2.7 millions tonnes were exchanged, at an average price of $7.60/t of CO2. In 2001, the system was extended to cover the former Arco, Vastar and Burmah-Castrol assets which BP acquired in 2000. During 2001, 4.5 million tonnes were traded at an average price of $36/t of carbon dioxide (Fig. 7). 8.3. Lessons learned Many valuable lessons have been learned from the operation of the BP emissions trading system. We believe that these apply not only to other companies interested in using emissions trading to meet their goals, but also to the development of government sponsored systems as well. Lessons include some of the following related to market fundamentals:
8.1. Banking *
The carrying forward of allowances from one year to the next was allowed but was regulated. An initial
*
* 1
Equity means emissions from all equity stakes in operated and nonoperated activities by BP. Direct means emissions which come directly from these operations, i.e. this excludes emissions from imported power used in our operations.
The need to keep things simple. It is helpful to engage key stakeholders at the formative stages. Data quality is the key to a successful trading system, particularly in the early years of a climate program. It is important the trading entities understand their historical, current and future emissions.
M. Akhurst et al. / Energy Policy 31 (2003) 657–663 *
No allocation process is correct—however there is a need to ensure that it is linked to targets so that allocations equal the emission target established; and relatively stable without changes throughout the compliance period.
Just as important as the fundamental design of the system, is the manner in which it is developed and deployed. Those lessons include: *
*
The importance of linking compliance in the trading system to managerial performance reporting. In a broader context, ensure that there are appropriate penalties for non-compliance. Also critical is the need to establish a clear set of simple trading guidelines—designing for the 90% of ‘good actors’ instead of focusing on the 10% of ‘bad actors’.
Finally, we have learned many lessons about the other considerations in how entities approach emissions reductions in a free market. *
*
That multi-year trading is more conducive to investment in capital projects. And that price alone does not determine reduction efforts—the capital cycle must be considered as well.
9. Conclusions BP has discovered the importance of making a start and learning from practical experimentation with emissions trading. The approach presented in this paper and the experience with trading to date is an important
663
step in moving the understanding forward. BP recognises that the system was a simple one—indeed that was the intent, in order to allow rapid start up and early learning. There may be deficiencies in this system, but the only way to start is with a simple framework that will encourage businesses to participate. Development of this approach involved an extensive consultation process with the BUs—their input from a wide range of disciplines and from varying types of businesses was crucial. The development of the system required dialogue between all stakeholders for continual optimisation. BP remains convinced that trading has considerable potential to reduce greenhouse gas emissions at least economic cost. The creation of a new business asset through emissions trading is likely to create the right incentives to innovation and investment, and which cannot be matched by command and control regulation, taxes or even tax breaks. The BP emissions trading system has played a key role in helping BP meet its target, to reduce emissions by 10%, notably through enabling and accelerating widespread engagement in the issue across our businesses. Since BP began internal trading in 2000 (pilot scheme in 1999), significant developments have taken place externally. In April 2002, the UK emissions trading scheme started trading. Other national and regional trading systems are beginning to emerge. In order to open space for engagement in these emerging frameworks, BP has suspended its internal trading system and will evaluate the business case for joining emerging external schemes, on a case-by-case basis.
Greenhouse gas emissions trading in BP Mark Akhurst*, Jeff Morgheim, Rachel Lewis BP International, Britannic House, 1 Finsbury Circus, London EC2M 7BA, UK
Our goal is to reduce our emissions of greenhouse gases by 10% from a 1990 baseline In our terms that target will now sit alongside our financial targets. That means it is a promise and, as with our financial targets, a promise is a personal commitment Lord Browne Yale School of Management—18 September, 1998
and was the first global greenhouse emission trading system of its kind anywhere in the world. This paper sets out the theoretical case for the use of trading to achieve environmental objectives; explains the thinking behind BPs implementation of an internal emissions trading system and outlines the lessons learned from the operation of that trading system. 2. The case for emissions trading
One of the steps we’ve taken is to set up a trading system within the company to ensure we cut emissions in the most cost effective way possible. Over the next 18 months we’ll expand that system to include all the activities of BP Amoco Lord Browne Detroit Economic Club—25 January, 1999
1. Introduction In September 1998, Lord Browne, CEO of BP, announced that BP would set itself the target of reducing its greenhouse gas (GHG) emissions to 10% below 1990 levels by 2010. In March 2002, at Stanford, Lord Browne announced that BP had met its target, 7 years ahead of schedule, and went on to outline BPs new commitments on climate change, to hold emissions at 2001 levels, through 2012, through a combination of improved internal energy efficiency and the use of external market mechanisms, including emission trading and emission reduction credits. A key element in BP meeting its first target has been the use of emissions trading. BP used a group-wide emissions trading system as a central tool to deliver the target in the most cost-effective way possible. The system began trading group-wide on January 1st 2000 *Corresponding author. E-mail address: [email protected], [email protected], [email protected] (M. Akhurst). URL: http://www/bp.com.
Economic theory suggests that ‘‘trading’’ emissions should allow an environmental target to be achieved at the least cost to the economy. This is because firms for whom emissions reduction are cheap, can reduce their emissions and sell those emission rights to firms who would have to pay more to reduce their greenhouse gas emissions. Trading should be a better way of achieving the world’s objectives than the suggested alternatives— command and control regulation which imposes the same standard on everyone, irrespective of the costs they face or taxation, which just raises the price to everyone, irrespective of whether they have a cheap alternative or not. These are both blunt instruments, whereas emission trading is a precision tool. Trading is an important policy alternative to taxation, and has the important advantage that it can work with voluntary agreements (it may be possible for it to work with tax). The aim of both trading and voluntary agreements is to motivate positive responses to a shared problem. In a trading system, companies (assuming they are the trading entities), receive emissions allowances for greenhouse gases. They need to reduce their emissions to that level, buy allowances from others to effectively reduce their emissions, or sell to others if they have an excess of allowances. Trading is a market mechanism that has considerable appeal. It drives companies to look at what options they have available to reduce emissions, in a very quantitative way. And when the market exists, it makes companies ask themselves why competitors are finding lower cost options than they have found themselves. It is a stimulus to bringing new technology into practice,
0301-4215/03/$ - see front matter r 2003 BP plc. Published by Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 2 ) 0 0 1 5 0 - 7
658
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Emissions Trading
Emissions Trading
Clean Development Mechanism (CDM)
Economic logic is clear
Political challenge is great
They provide cost effective approaches to mitigation
There are still many details to be resolved
Could provide benefits for both developed and developing countries and the private sector Need for collaboration between private sector and government to develop these mechanisms into useful tools
Fig. 1. Kyoto protocol, flexible instruments.
because it sets a real cost on emissions and provides market incentives to reduce that cost. Greenhouse gases are particularly appropriate for trading. Unlike other pollutants, where the local impact matters, the goal is to reduce global concentrations of CO2 and the other greenhouse gases, the effect is the same if emissions are reduced in Pittsburgh or Portugal, the North Sea or the Gulf of Mexico. But there is only limited experience of emissions trading in practice. The most successful example of emissions trading is the United States sulphur dioxide trading scheme, which delivered the required emissions reduction faster and at less cost than had been predicted. The agreement at Kyoto commits most OECD countries, the countries of Central Europe, Russia and Ukraine (the ‘‘Annex 1’’ countries) to targets for the period 2008–2012 for a basket of six greenhouse gases to be achieved. These targets are differentiated, to take account of different national circumstances, but require, on average, approximately a 5% cut from 1990 emissions levels. Since emissions would otherwise have been expected to grow, and in most cases are already higher than 1990 levels, the targets imply deeper cuts compared to a ‘‘business as usual’’ base. Other countries were not given targets at Kyoto. The protocol makes provision for three types of ‘‘flexible mechanisms’’ or Kyoto mechanisms: * *
*
in Article 17, for trading between Annex 1 countries; in Article 6 for joint implementation projects between Annex 1 countries; in Article 12 for credits to be earned for projects in non-Annex 1 countries through the Clean Development Mechanism.
Rules have yet to be fully developed for these three ‘‘flexibilities’’. Several governments are progressing with domestic emissions trading schemes:
The United Kingdom has started a voluntary GHG emissions trading scheme, which began trading in April 2002. Other countries including Denmark, France and China are at various stages of development with their own domestic schemes. The European Union is in the process of developing an emissions trading directive (Fig. 1). BP believes that there is a strong case for allowing international trading of emissions to deliver the agreed emissions reductions at least economic cost. It believes that emissions trading will prove to be a better instrument than either of the two principal other options—taxation and command and control regulation. Some of the advantages of emission trading are: *
*
*
*
the method by which emissions are reduced is not prescribed and therefore allows flexibility to achieve the most economically efficient emissions reductions; it provides the appropriate price ‘signal’ for emissions abatement and therefore the incentive to invest in abatement technology; the ‘market’ for emissions will price emissions appropriately and give the right signals for efficient investments to meet the required target; under a cap and trade system there is greater certainty that prescribed targets will be achieved since there is a determined finite number of allowances allocated.
3. Establishing the BP emissions trading system BPs basic operating model lends itself to the implementation of an emissions trading system. The basic model consist of four business streams: * *
Upstream (exploration and production). Downstream (refining and marketing).
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
659
Fig. 2. BP portfolio.
CO2 equivalent emissions from BP Business Units 1st
2nd
3rd
4th
100%
5th
90%
8000
80%
7000
CO2 equivalent (K tons)
70% 6000 60% 5000 50% 4000 40% 3000 30% 2000
Culumative percentage of CO2 equivalent emissons
9000
20%
1000
10%
0
0% Business units
Fig. 3. Distribution of allowances to BP business units.
* *
Chemicals. Gas, power and renwables.
Within each stream, individual business units (BUs) have their own performance contracts to deliver agreed objectives. When BPs emissions trading system began in 2000, there were approximately 150 individual BUs within BP, operating in 100 countries. The BUs varied greatly in their emissions, for example, 40 BUs accounted for approximately 80% of BPs total emissions. All BUs were given an allocation of allowances and all were eligible to participate in the trading system (Figs. 2 and 3). The development of BPs trading system was carried out jointly by a BP team, comprising representatives
from all relevant parts of BPs business, together with Environmental Defence (ED) who played an important independent guiding role in the development of the system.
4. Emissions data—measurement and verification The cornerstone of a successful emissions trading programme is having a robust and credible system in place to measure, and where appropriate, verify the greenhouse gas data being used in the trading system. Each BU is responsible for measuring or calculating its emissions. Standard reporting protocols for carbon dioxide (CO2) and methane (CH4) have been used by
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
660
ACT Greater Prudhoe Bay NGL
Shipping
Canada Gas Cherry Point San Juan Permian Carson
Whiting Texas City Castellon Cooper River Mid Continent Gulf of Mexico Trinidad East Trinidad West Global Power Venezuela
East of Shetland Forties pipeline CNS Gas Kazakhstan Bayernoil Azerbaijan Lavera Egypt Oil Gulf States/ Abu Dhabi
Indonesia Australia Upstream
Sapref
Site visits 2001
Limited Scope Reviews
Site visits 1999/2000
Fig. 4. BP sites audited in 2001.
the BU’s to collect and report 1990 and 1998 emissions data, as part of BPs overall environmental performance reporting. A data audit and verification has been developed with a group of external partners (KPMG, DNV and ICF), selected to provide the appropriate skills from the financial and environmental auditing sectors. For 2000 and 2001, in the auditor’s opinion, our total (direct and indirect) equity share GHG inventory has been found to be free from material mis-statement when verified against our group reporting guidelines. The auditors have recommended areas for improvement to our data and assurance processes and we plan to review these suggestions for incorporation into our group reporting guidelines and other procedures, where appropriate (Fig. 4). 4.1. Abatement costs Understanding the cost of abatement on a project-byproject level is vital for BUs to engage in emissions trading. Guidelines for calculation methodology and assumptions have been developed for BUs to maintain some consistency in the approach. It was each individual BUs responsibility to identify and know its cost of abatement. A database of greenhouse gas abatement projects was constructed to share ideas on cost effective options throughout the BP group. 4.2. The emissions boundaries in our system The GHG emissions boundaries for our ET system were set on an equity and direct basis. This was the same as for the Group GHG target. Equity means emissions
from all equity stakes in operated and non-operated activities by BP. Direct means emissions which come directly from these operations, this excludes emissions from imported power and steam used in our operations (Fig. 5).
5. A broad outline of BPs emissions trading system BPs emissions trading system was based on a cap and trade concept. In order to put such a scheme in place two key elements were needed—target setting the cap on emissions and a system for allocation of allowances to the participating BUs. Each BU was allocated a fixed number of annual allowances to emit greenhouse gases. A BU was required to stay within its allocation annually—if its actual emissions were above its total number of allowances for that year the BU was required to buy allowances from the market to ensure compliance. If its emissions were below the allocation, it could sell allowances. Throughout the year BUs were able to trade allowances with other participants in the system through the central broker, buying up or selling out allowances to cover their projected emissions. All deals were registered and traded through the central broker who was based in BPs Integrated Supply and Trading (IST) group. Both carbon dioxide (CO2) and methane (CH4) were traded in the BP system. For reporting purposes, CH4 was reported in units of CH4 but was converted to CO2 equivalent units for trading. CH4 has a global warming potential (GWP) 23 times that of CO2 over a 100 year
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Understand your Emissions Source and Type
Measure and verify your emissions
661
Identify GHG reduction opportunities across your business
Implement trading strategy
The key is to understand emissions from your business, where they are heading and the marginal cost of abatement then compare with the market price Some measures may have +ve economic impacts Need to re-think management of energy Engage employees to meet the challenge and identify solutions Communication and networking within and between BUs to identify best options - Collaboration
Fig. 5. Engaging in emissions trading.
emissions limit after trading carbon dioxide emissions
time horizon—therefore BP decided so set one tonne of CH4 emissions equal to 23 t of CO2 in the trading scheme. The unit that was traded in our emissions trading system was termed an allowance. BU’s allowances were held centrally at IST in a GHG registry. One allowance equated to one metric tonne of CO2 equivalent and each had a unique serial number that was used as a tag to identify the vintage (year), the originating BU and country of origin. It was important to keep a record of the flow of allowances between countries in the event that regulation take place at the national level (Fig. 6).
units bought
-10
+10
units sold
emissions limit before trading
emissions limit after trading
50
Each company is allocated 50 permits to emit 50 tonnes
Company 1
50
Company 2
Fig. 6. Emission trading in BP.
6. Ensuring compliance in the BP system *
Greenhouse gas allocations were fixed in the performance contracts of Business Unit Leaders (BULs) and progress reported in the financial performance indicators for the company. BULs were therefore accountable for meeting their targets on an annual basis—the GHG performance therefore sat alongside their financial performance and required equal consideration. Therefore, the performance contract was the compliance mechanism in the BP system. As allowances were not yet externally recognised, assets, costs and revenues from trades were tracked and used to assess trading performance relative to investments in GHG reductions, but were not part of ‘above the line’ performance.
7. The group cap A group cap was set annually to steer BP towards the GHG target—it was therefore the central link between the allocation process and the GHG target, having two primary objectives:
*
incorporate a ‘‘real’’ annual reduction, i.e. to drive real operational reductions; steer progress towards the 10% reduction target.
7.1. Setting the group cap The group cap determined the total aggregate allowances available to the BUs. The Group cap was referenced to BPs 1998 GHG emission level. This is sometimes referred to as a grandfathered approach—i.e. allocating back to some historic point in time. 1998 was chosen as the base year as it was, at the time, the latest and most accurate set of data for the BP Group and most relevant to the composition of BP at the time. The aggregate total was also very similar to the total in 1990, which is the base year for our GHG target. The group cap was set to take account of change within the organisation. Allowances associated with divestments or closures were cancelled. Conversely, new acquisitions were given allowances based on their 1998 emissions but were also faced with a reduction target.
662
M. Akhurst et al. / Energy Policy 31 (2003) 657–663
Fig. 7. BP emissions trading system 2001.
8. How the allocation was made to the individual BUs The starting point of allocations was the BUs’ actual emissions in 1998. ‘Emissions’ for this purpose were direct emissions from BP assets, apportioned according to the BP equity share in the facility.1 The annual group cap, less the quantity of allowances banked from the previous year, was expressed as a percentage reduction from the Group 1998 emissions or ‘allocation factor’. The allocation factor, applied to each BU’s 1998 emissions, set the BU allocations. No allocations were given for growth in operations. Allocations were adjusted for acquisitions and divestitures. (Note: Streams were given some flexibility to adjust 1998 emissions for shutdowns prior to the system start-up in 2000.) When the allocation process was complete, each BU registered that allocation with the Broker in IST. This was the allocation that the BU was required to operate within, by its own actions, or by trading. This approach aligned the allocation process to the delivery of the group target (i.e. the group was required to deliver reductions against existing emissions and absorb growth). It also ensured that emissions reduction options were considered during new project developments.
threshold of a maximum of 5% of an individual BUs allocation could be banked. 8.2. Market summary In 2000, BP launched its trading system covering all of the former BP and former Amoco assets. A total of 2.7 millions tonnes were exchanged, at an average price of $7.60/t of CO2. In 2001, the system was extended to cover the former Arco, Vastar and Burmah-Castrol assets which BP acquired in 2000. During 2001, 4.5 million tonnes were traded at an average price of $36/t of carbon dioxide (Fig. 7). 8.3. Lessons learned Many valuable lessons have been learned from the operation of the BP emissions trading system. We believe that these apply not only to other companies interested in using emissions trading to meet their goals, but also to the development of government sponsored systems as well. Lessons include some of the following related to market fundamentals:
8.1. Banking *
The carrying forward of allowances from one year to the next was allowed but was regulated. An initial
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* 1
Equity means emissions from all equity stakes in operated and nonoperated activities by BP. Direct means emissions which come directly from these operations, i.e. this excludes emissions from imported power used in our operations.
The need to keep things simple. It is helpful to engage key stakeholders at the formative stages. Data quality is the key to a successful trading system, particularly in the early years of a climate program. It is important the trading entities understand their historical, current and future emissions.
M. Akhurst et al. / Energy Policy 31 (2003) 657–663 *
No allocation process is correct—however there is a need to ensure that it is linked to targets so that allocations equal the emission target established; and relatively stable without changes throughout the compliance period.
Just as important as the fundamental design of the system, is the manner in which it is developed and deployed. Those lessons include: *
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The importance of linking compliance in the trading system to managerial performance reporting. In a broader context, ensure that there are appropriate penalties for non-compliance. Also critical is the need to establish a clear set of simple trading guidelines—designing for the 90% of ‘good actors’ instead of focusing on the 10% of ‘bad actors’.
Finally, we have learned many lessons about the other considerations in how entities approach emissions reductions in a free market. *
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That multi-year trading is more conducive to investment in capital projects. And that price alone does not determine reduction efforts—the capital cycle must be considered as well.
9. Conclusions BP has discovered the importance of making a start and learning from practical experimentation with emissions trading. The approach presented in this paper and the experience with trading to date is an important
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step in moving the understanding forward. BP recognises that the system was a simple one—indeed that was the intent, in order to allow rapid start up and early learning. There may be deficiencies in this system, but the only way to start is with a simple framework that will encourage businesses to participate. Development of this approach involved an extensive consultation process with the BUs—their input from a wide range of disciplines and from varying types of businesses was crucial. The development of the system required dialogue between all stakeholders for continual optimisation. BP remains convinced that trading has considerable potential to reduce greenhouse gas emissions at least economic cost. The creation of a new business asset through emissions trading is likely to create the right incentives to innovation and investment, and which cannot be matched by command and control regulation, taxes or even tax breaks. The BP emissions trading system has played a key role in helping BP meet its target, to reduce emissions by 10%, notably through enabling and accelerating widespread engagement in the issue across our businesses. Since BP began internal trading in 2000 (pilot scheme in 1999), significant developments have taken place externally. In April 2002, the UK emissions trading scheme started trading. Other national and regional trading systems are beginning to emerge. In order to open space for engagement in these emerging frameworks, BP has suspended its internal trading system and will evaluate the business case for joining emerging external schemes, on a case-by-case basis.